Magazine

Land of Less Opportunity

June 29, 2003

In recent decades, income inequality in the U.S. has grown sharply, far outpacing similar rises in other industrial countries. This trend, which reflects hefty gains reaped by those at the upper end of the income scale as well as meager gains at the middle and bottom, has disturbed many economists who believe that it may ultimately harm the nation's social and economic health.

Others, however, argue that this picture is exaggerated. The widening range of incomes, they claim, simply reflects the greater labor-market flexibility and job instability inherent in today's high-productivity economy.

In this view, families facing temporary income shortfalls in the New Economy can still come out ahead. Assuming their incomes bounce back, they may well wind up with higher lifetime incomes. That is, greater income inequality among households isn't so worrisome if it has been offset by rising family income mobility.

But has it? A recent study by Katharine Bradbury and Jane Katz of the Federal Reserve Bank of Boston is hardly reassuring. Drawing on survey data on the income paths of individual households over time, they find that income mobility has declined in recent decades. Upward mobility -- the share of families moving from one quintile, or fifth, in the income distribution to a higher quintile -- decreased in the 1980s, and slipped even more in the 1990s.

In the 1970s, for example, nearly 10% of families who started in the bottom three-fifths of the income ladder wound up in the top fifth at the end of the decade. In the 1990s, however, only 7.2% managed to do so, even though most incomes rose in real terms.

The decline in upward mobility is troubling. For one thing, another recent study found that many low- and middle-income households have been taking on more debt to maintain their living standards in the face of greater income volatility (BW -- Feb. 24). Falling income mobility implies that those with high income expectations may find themselves with reduced savings when they reach retirement.

It also implies that the nation's lopsided wealth distribution is likely to worsen, particularly if the estate tax is eliminated. Estimates by Federal Reserve economist Arthur B. Kennickell indicate that in 2001, the top 1% of families, including the superrich, held 34% of America's total household net worth, and the top 10% held more than 70% -- compared with the bottom 50%, which held only 2.8% of the wealth.

The public still seems to have an abiding faith in the American dream of achieving affluence. But unless the decline in income mobility is reversed, that faith may waver. And the sharp growth in income and wealth inequality may yet become a contentious political issue. When prisoners on death row have exhausted all their appeals, their only chance of survival rests on having their death sentences commuted. If justice in such cases is truly fair, then only the facts of the crime should affect an inmate's chances of receiving clemency.

Apparently, however, this principle of just treatment under the law is often violated. Surprisingly, death-row inmates who are poorly educated, minorities, females, or relatively young turn out to be significantly more likely to have sentences commuted than those with the opposite characteristics. Minorities are also more likely to receive clemency from Democrats but fare worse under white governors. And lame duck governors are notably prone to commute sentences.

These findings come from a new study by Laura Argys and Naci Mocan of the University of Colorado at Denver. Tracking some 5,800 people on death row during a period from 1977 to 1997, the two economists focused on the 22% of this group who eventually were either executed or had their sentences commuted -- usually after years of appeals.

Their analysis reveals that the race, gender, or age of a death row inmate, the party affiliation and race of the governor, as well as whether the governor is leaving office, may well determine whether an inmate lives or dies. And that, write the authors, is not "equal justice under law." Widespread fears that Europe may be skirting recession are overblown, says Conference Board economist Gail Fosler. Notwithstanding Germany's current woes and the drag from the strong euro, she reports that economic indicators point to a developing economic upswing that should lift growth in the region to 3% or so late this year and in 2004.

In part, this is due to the region's close links to the U.S. economy, which is expected to start picking up steam soon. But Fosler also stresses the continuing gains as companies take full advantage of the single-currency market. Moreover, as the euro zone expands, it's bringing in countries with both low wages and high-quality workers, making them internationally competitive.

Fosler notes that changing labor rules are allowing more part-timers and contract workers to find jobs. That has made the economy more flexible, lifting consumer sentiment and demand and raising per capita incomes. Indeed, in the second half of the 1990s, the number of hours worked grew almost as fast in Europe as in the U.S.

The long-term picture is bright as well. Europe's absolute productivity levels aren't far below U.S. levels (chart). And if it can expand hours worked by 1% a year and productivity by 2% (the 1990s' average), its potential growth rate would be 3% -- nearly that of the U.S. Once Europe's economy emerges from the slowdown, says Fosler, ongoing restructuring should yield "huge gains."